Eurodollar Certificates of Deposit (CD)

This lesson is part 8 of 8 in the course Key Financial Instruments

Eurodollar certificate of deposit, or just Eurodollar CD, is a negotiable dollar-denominated time deposit issued by a U.S. bank located outside the US or by a foreign bank located abroad. It’s the same thing as a domestic CD expect that it’s the liability of a non-US bank. Eurodollars also include dollars deposited in international banking facilities in the US.

Characteristics

Eurodollar CDs are not insured by FDIC, and are also free from US regulations and reserve requirements. They also don’t attract any fees imposed by FDIC.
Eurodollar CDs are generally issued in denominations above $1 million, however the stipulated minimum is $100,000.
They are denominated in US dollars (not in the foreign currency).
They have a maturity of minumum 7 days, but are mostly issued for 3 to 6 months.
Issuing banks are not allowed to purchase their owm CDs.
Eurodollar CDs sold at face value either directly to investors or depositors or through dealers/brokers.
Settlement is on a two-day basis.

Uses

Issuers have the benefit of lower cost of funds due to no regulatory costs and reserve requirements.
Buyers receive slightly higher yields while maintaining reasonable liquidity.
Issuers can use the funds received for various purposes such as invest, improve reserves, maintain liquidity, or even lend to others outside the US.

Marketplace

London is the center of the he Eurodollar CD, however, activity also happens in offshore branches. The market is mostly accessible to large institutions. The small investors may access these through money market funds.

Pricing

Eurodollar CDs are priced based on LIBOR. Since they are issued in a foreign country, they are considered slightly riskier compared to the docestic CDs, and therefore offer a higher yield.

Eurodollar CDs are quoted on an actual/360-day basis. The bid/offer quotes are in 16ths (for example, 12 7/16). A bid/offer rates of 10 7/16 and 10 3/16 would roughly translate to a bid interest rate of 10.4375% and an offer rate of 10.1875% percent, respectively, giving the dealer a spread of 25 basis points.

Risks

The key risks include credit risk, sovereign risk, and liquidity risk.

The Eurodollar CDs are not rates, however most issuers issuers are rated by either Thompson Bankwatch (for domestic banks) or IBCA, Ltd. (for foreign banks).